Wal-Mart sees discounts pressuring margins

NEW YORK (MarketWatch) -- Wal-Mart Stores Inc. reported Thursday a gain in July same-store sales and said early back-to-school sales were encouraging, but the retailer also cautioned that widespread discounting is hurting margins.

Shares were down 1.7% at $47.60 in morning trading.

The Bentonville, Ark.-based company
WMT, -2.75%
part of the Dow Jones Industrial Average, said sales at stores open at least one year rose 1.9% last month compared to July 2006. Analysts, on average, had expected the same-store sales to rise 1.5%, according to estimates compiled by Thomson Financial.

Total company sales for the four weeks ended Aug. 3 rose 6.5%, reaching about $27 billion.

The retailer also forecast that same-store sales of its U.S. operations for the four-week August reporting period would rise between 1% and 2%, while noting that weakness in home good and apparel is expected to carry into the second half of the year.

"In the current economic environment, our customers depend on Wal-Mart to save them money on merchandise that they need," said Eduardo Castro-Wright, Wal-Mart Stores U.S. president and chief executive.

"Customers are responding to the pricing initiatives and traffic trends are improving," he said in a statement. "However, this is impacting gross margins."

Last month, Wal-Mart stepped up its promotional activity and unveiled a plan to slash the prices on 1,600 items ahead of the crucial back-to-school shopping season. See full story.

Total net sales for the company's fiscal second quarter were about $92 billion, Wal-Mart said. It will report quarterly earnings on Aug. 14 before the market opens.

Grocery gains

At Wal-Mart stores, grocery sales were once again stronger than general merchandise sales in July. Perishables led the increase in grocery, with solid performance in dairy and bakery, as well as pharmacy, the company said.

Electronics continued to show "solid" same-store sales gains over last year, with strength in TVs, computers, digital cameras and video games. Net sales at Wal-Mart stores rose 3.2% to about $17 billion, while same-store sales rose 1.3%.

Wal-Mart, the world's largest retailer, said that it is "encouraged by positive early signs in back-to-school and back-to-college categories" but that July's sales of apparel and home goods overall continued to be soft and are expected to remain so through the third quarter.

At its Sam's Club's warehouse stores same-store sales rose 5.1% excluding fuel, and 4.9% including fuel, driven by continued momentum with small-business owners. In addition to small-business categories, other strengths included electronics, fresh food and grocery. Net sales at Sam's Club rose 6.7% to $3.28 billion.

Wal-Mart said its international customers are feeling the same economic pressures as U.S. consumers, particularly in Mexico where the economy's experiencing lower growth and less retail-level demand.

By the same token, the company saw positive sales results in certain markets, including Brazil and the U.K. International sales rose 15.9% to $6.73 billion.

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